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What is a Chatbot? How Do They Work? The Ultimate Guide

Lara Proud
Product Marketer

Explore the types of chatbots, best practices, and how to adopt a chatbot for your business. Learn about the future of AI-driven customer interactions.

Chatbots seem to be popping up everywhere these days.

Every website, e-commerce store, or services website you head to seems to have a messaging apps chat bubble floating in the corner - and for good reason.

These AI-powered (artificial intelligence) virtual assistants are changing the game when it comes to customer service and support - a technology that simulates human conversation in a powerful and effective way.

In this guide, we'll explore the magical world of AI chatbots, equipping you with a complete guide to understand what they are, how they work their magic, the different types that exist, and why adopting one could be the best decision your business makes this year!

With the sheer volume of customer inquiries skyrocketing across channels (we're talking about a 370% increase in service tickets on WhatsApp alone, as per Zendesk), AI chatbots have become a secret weapon for businesses to boost efficiency while also improving customer satisfaction.

So whether you already use an AI chatbot or are just curious to learn more, by the end of this post, you'll be a certified chatbot pro with all the know-how you need to evaluate if these artificial intelligence helpers deserve a place in your business toolkit.

Let's get into it.

What are Chatbots?

A graphic of a chatbot standing at a computer on a white desk

Simply put, an AI chatbot is a piece of software that can have conversations with humans. Customers interact with the website, talking to an AI system, presenting queries and questions that are then answered in real time.

Modern chatbot systems are able to understand what a person types or says and respond in kind, making it seem like you're chatting with a real person and having a human conversation!

Okay, they don't actually understand in the typical sense. Using a technology known as "Natural Language Processing," it can scan messages to pick out the words that link to phrases that link to solutions.

For example, if we come to your website and write, "What is your refund policy?" NLP picks out "refund policy" and "what is" and can link to your refund policy, but will display this content in a chatty, conversational, human way.

A women sits on a couch using a laptop while making notes.

That means there's no need for someone, or you, to sit at a computer answering all questions that come to your website. A machine does it all for you, saving you time, resources, and ensures you're available 24/7 - whenever your customers want to get hold of you.

How's that for a positive experience for your satisfied customers?

We'll dive into a little more detail on this later, but there are a couple of key types of chatbots you need to know:

  • Rule-based chatbots: Limited capabilities since they follow strict conversation rules. But good for common/repeat questions.
  • AI chatbots: More advanced, able to handle random questions using NLP (natural language processing) and machine learning to understand language.

As for what these puppies can actually help with, chatbots excel at:

  • Giving your customers a human-like, conversational experience when they have questions or need help.
  • Streamlining customer interactions so inquiries get solved faster.
  • Answering common questions about a product/service 24/7.
  • Automating tasks, like booking appointments or flights.

And you've probably already seen and used these yourself, especially if you're used to using platforms and talking with businesses on websites like Facebook Messenger.

Again, chatbots make customer service and support way more instant, personalized and just better all around! No wonder businesses are racing to implement them, with 52% of B2B websites using them and 42% B2C (source), which are increasing year on year!

With the basics covered, let's look closer at the incredible ways chatbots are evolving customer experiences...

What are the Benefits of Chatbots?

Two women sit at a computer visiting a website that uses a chatbot to help meet their needs

Implementing a chatbot comes with a whole treasure chest of benefits for businesses looking to upgrade their customer experience game. For example:

  • 24/7 availability: Chatbots provide nonstop support, unlike a human agent who'll need sleep! That round-the-clock responsiveness is key for a staggering 90% of modern consumers who expect an instant response when contacting a business.
  • Scalable support: With customer requests increasing across industries, chatbots work to take the pressure off overburdened human teams. Since you're using a machine, their work capacity is limitless, saving companies serious cash on staffing costs.
  • Higher conversion rates: Predictive chatbots can give personalized recommendations to users based on their activity, turning more visitors into customers. Customers expect this level of service these days, and it's incredibly profitable for you when done right, so don't overlook this!
  • Tailored conversations: These savvy bots track customer data and previous interactions to enable customized dialogues for each person. The result? Happier customers and stellar experiences based on the personalized service you have to offer.

In some cases, you can also enjoy a ton of other benefits, such as chatbots that operate in multiple languages, allowing you to simulate human conversation with a global audience and improve customer engagement anytime, anywhere, so it's worth bearing in mind how creative you can be with this technology.

In a nutshell, by implementing chatbots as customer service sidekicks, businesses can deliver 24/7 personalized support, scale infinitely to handle demand, and boost conversions. That's an ROI trifecta if we've ever seen one!

The Importance of Chatbots: Unpacking the Numbers

A glass-like graphic displaying computer text on large language models and how they work

Okay, let's crunch some numbers.

Chatbots have become a crucial part of modern business operations, but just how much they've had an effect is incredibly important to know. What's more, this is a technology that's just taking off and is still in the early stages, and with the increasing growth of the AI industry, there's no doubt that this sector will continue to grow over the coming years.

Below, we'll take a deep dive into why these digital assistants are so valuable, their impact on businesses, and the difference they make in customer experiences.

Statistics gratefully complied by Chatbot.com!

1. The Why: Importance of Chatbots for Businesses

Chatbots play a crucial role in streamlining business operations and improving company performance. Here are a few stats to drive this home:

  • Chatbots can automate up to 73% of tasks in sectors like healthcare, making operations more efficient [Zendesk].
  • Businesses using chatbots report a remarkable 90% improvement in the speed of complaint resolution [MIT Technology Review].
  • An impressive 84% of businesses believe AI chatbots will play an increasingly important role in customer communication [CCW].
  • Looking to increase conversion rates by as much as 15%? AI-powered proactive chat strategies may be the solution you've been looking for. [Zowie].
  • Chatbots are already heavily used in certain industries, with a concentration rate of 58% on websites of B2B companies [Boomtown].
  • The global chatbot market is projected to grow at a CAGR of 23.3% from 2023 to 2030 [Grand View Research].

2. The What: Role of Chatbots in Business Operations

Various industries have realized the potential of chatbots in different operations, from customer service to sales:

  • A major application of chatbots lies in customer service, where 35% of people use chatbots to carry out certain tasks, like resolving complaints or acquiring certain detailed information on products and services[Backlinko].
  • Chatbots are also used increasingly in sales: 41% of all business chatbots are used for this purpose[Intercom].
  • 80% of companies use conversational marketing tools, including chatbots, to engage with customers and potential clients[Drift].

3. The Perks: Chatbots and the Customer Experience

From a customer’s perspective, chatbots deliver real-time service, resolve issues, and improve the overall customer experience. Here's a snapshot of relevant statistics:

  • A staggering 74% of online users state that they prefer interacting with chatbots when seeking answers to straightforward questions rather than speaking to a human or support agent[PSFK].
  • 64% of consumers find 24/7 availability to be the most helpful feature of a chatbot[The Chatbot].
  • 41.3% of buyers started turning to digital assistants for purchases after 2020[Drift].
  • 56% of customers prefer to message rather than call customer service[Outgrow].
  • In 2023, the average time customers had to wait (in a queue) was reduced to 3 min 40 sec, compared to 5 min 16 sec in 2022[LiveChat].

Drawing from this evidence, it's evident that businesses stand to gain significantly from integrating chatbots into their operations.

Not only do these AI-powered digital assistants help streamline various processes, but they also enhance the customer experience, driving greater satisfaction and loyalty.

What are the Types of Chatbots?

When considering a chatbot, it's critical to understand the major types available and how they differ based on their underlying chatbot technology and use cases:

  1. Help Center Bots - These are typically predictive chatbots designed to guide customers to solutions by letting them dig through layers of self-service content. Perfect for tackling frequently asked questions and taking a load off human agents.
  2. Decision Tree Bots - Follow pre-defined conversation flows based on responses, directing users to answers. Although not as versatile as AI bots, they efficiently route customers and allow them to self-service with ease.
  3. Task-Oriented Bots - Built for specific functions like appointment booking, status updates and more. Ideal for businesses with specialized needs.

As one expert put it, "The bot you choose depends on your business. Task bots suit specialized functions while helping bots manage general customer queries."

In short, grasping the unique capabilities of different chatbot types is key in determining which is the best fit. Aligning their strengths to your goals and priorities enables fully leveraging their potential.

How to Adopt a Chatbot into Your Business

Looking to add a chatbot to your business' roster? Adopting this promising technology the right way involves a phased approach:

  1. Clarify Goals - Pinpoint the key tasks you want to automate, like improving customer service, streamlining operations or increasing sales.
  2. Select the Right Chatbot Type - Choose the complexity level fitting your needs, from basic bots for simple user interactions to advanced AI models. You want to ensure proper natural language understanding throughout with minimal human intervention, so make sure you pick the chatbots that are best for you.
  3. Map Out Conversations - Carefully script how your chatbot will communicate to balance efficiency with human-like warmth.
  4. Pick a Chatbot Platform - Shop around for the best platform matching your budget, technical abilities and scope of work. There are lots of modern chatbots out there, so make sure you're conducting your due diligence.
  5. Test Thoroughly - Trial your chatbot extensively pre-launch to catch any issues needing refinement.
  6. Implement & Optimize - Deploy your chatbot while monitoring performance closely, tweaking regularly per customer feedback and data.

Integrating modern chatbots takes strategic planning and care but pays dividends in enhanced efficiency and customer experience!

Chatbot Best Practices

A person sitting down to write out their chatbot responses and program structure

If you want to get the most out of how chatbots work and want to set yourself up for a successful chatbot deployment and utilization, the following practices have proven effective:

  • Maintain Transparency: It's essential to let users know when they are communicating with a bot. Transparency is indeed a cornerstone of trust and acceptance. Never let users believe they're interacting with a human when it's a bot.
  • Give it a Human Touch: Although it's clear that a chatbot is not a human, designing it to mimic certain nuances of human conversation can enhance user comfort and engagement. This could involve using a friendly tone, employing emojis, or employing syntax that mirrors human speech.
  • Ensure Smooth Handoff: Despite their efficiencies and powerful machine-learning nature, chatbots might be unable to handle all customer queries via Live Chat. It's pivotal to have a smooth transition process to customer care agents in place for those complex queries that require a human touch.Remember, at the end of the day, you're here to solve customer queries quickly and effectively. You need to find the best way to achieve that in a way that's right for your business. Chatbots are just a computer program in your toolkit to help succeed in this venture.
  • Deal with Misunderstandings Gracefully: Occasional misunderstandings are inevitable with chatbot interactions. Make sure your chatbot is programmed to handle these with grace, layered with repeated attempts to understand user requests.

To wrap up, adopting these best practices can optimize the chatbot experience for users, resulting in increased acceptance and effective utilization.

A man sits at a laptop on his desk feeling stressed while dealing with a poorly-designed chatbot

While integrating chatbots can offer numerous benefits, it's essential to consider some potential pitfalls of these automated systems.

They're not a silver bullet as far as computer programs go, if you're not implementing them properly or strategically, thee contextual chatbots may actually cause more harm than good.

That said, once you educate yourself on these problems, highlight these issues, and understand the practical solutions, you ensure a chatbot effectively operates as an asset rather than a liability in your business.

Let's dive in.

1. Limited Understanding of Natural Language

The natural flow of human conversation keeps evolving, further incorporating slang, misspellings, or sarcasm. It's the natural way of the world and what language and communication have always done.

However, most chatbots still struggle to keep pace with this evolution. They might misinterpret specific phrases or words, potentially leading to incorrect responses and frustrating customers.

If you're using a programmed chatbot, it'll always be restricted by what you've programmed it to say, at least until you've updated it to reflect modern communication trends. Alternatively, if you're using an AI chatbot, it may be outdated since it's trained on old data.

For example, ChatGPT's GPT model is trained on data from 2022 and earlier, meaning it has no information on events that happened prior to those dates.

This hurdle often restricts the use of chatbots for channels that are personalized and public, such as Facebook and Instagram.

Solution: Investing in Natural Language Processing (NLP) can improve your chatbot's ability to understand and communicate in a more human-like manner. You'll need to train your chatbot extensively using various linguistic inputs can enhance their understanding of colloquial speech.

Fortunately, if you're using a service like Deskpro, we do all that for you, so you only have to sit back and enjoy a fully functioning, up-to-date chatbot that handles your customer service interactions with ease.

2. Lack of Personalization or Emotion

Chatbots currently lack the ability to respond to customers with personalized or emotional insight. Sure, you can program them to appear this way, but it's not perfect. In situations where customers vent their frustrations, a straightforward, emotionless reply can often escalate the situation.

Solution: Tailoring responses to specific customers and situations can help add a layer of "emotional intelligence" to chatbots. Chatbots should be designed to escalate sensitive or complex matters to a live agent instead.

This approach ensures customers that they're heard and understood, improving overall customer experience.

3. Higher Capacity for Misunderstanding

When a customer's question isn't clear or is too specific, chatbots could struggle to assist. If a customer's query falls outside of a chatbot's database, it might circle around without providing a satisfactory answer or leave the customer unanswered—at detriment to your company’s image.

Solution: Implementing machine learning algorithms can teach chatbots to learn from every interaction, which includes learning from their mistakes. Moreover, having a system where a human can take over the conversation if it becomes too complex for the chatbot ensures customers are catered to effectively.

4. Maintenance Challenges

Chatbots need to be frequently optimized to keep providing accurate information. This task requires thorough, ongoing analysis of previous bot conversations, and as user demands shift, updates to the chatbot must follow.

Solution: Regularly scheduled audits of chatbot interactions can optimize its performance. Additionally, infusing your chatbot with AI can help it learn and adapt autonomously to changes as your business evolves.

5. Installation Costs

Advanced chatbot systems can have a high up-front cost, which may seem intimidating given their limitations.

Solution: Leverage both chatbots and live agents in your customer service department to create an efficient and budget-friendly system. Using cost-effective bots for first-level queries and live agents for more complex requests can yield better outcomes.

6. Loss of Customer Insights

Using chatbots might desensitize your business to valuable feedback from customers.

Solution: Implementing a system to record and analyze all customer interactions with the chatbot can uncover invaluable insights. These analytics can provide information regarding customer preferences, common issues, and areas requiring improvement.

Remember, chatbots might not be the right fit for every business model.

Thus, carefully considering your specific requirements and integrating a balanced mix of AI and human intervention can help you reap the benefits of chatbot technology while mitigating potential downsides.

Future Predictions for Chatbots

Chatbots have come a long way, but some inspiring innovations are still on the horizon! As we march towards 2024, cutting-edge advancements like context awareness and enhanced AI will enable chatbots to revolutionize customer experiences.

We're talking ultra-personalized conversations and engagement on a whole new level!

The research is promising, too - Gartner predicts that chatbots will handle a whopping 85% of all customer interactions by 2024 without any human input.

And that's not all. Juniper Research found that chatbot adoption could save large companies up to $8 billion every year through automation!

What's powering this chatbot takeover? Their ability to learn on the fly during real-time interactions, constantly refining their skills to serve up tailored solutions per user preferences and history.

In short, the age of supremely smart chatbots that deliver truly personalized wow moments is coming. And it promises to transform customer experiences as we know them!


Between lightning-fast AI advances and shifting consumer expectations, one thing seems clear - chatbots are poised to play a starring role in the future of customer engagement.

As we enter this next era of transformative technology, take time to understand your business goals. Then, seek out the chatbot with the fitting capabilities to drive them forward.

Here at Deskpro, we're gearing up to launch game-changing chatbot updates like contextual automated conversations across Live ChatMessengerAutomations, and more. The future promises more personalization, efficiency and wow moments than ever before!

So buckle up, because extraordinary innovations lie ahead in the world of chatbots! Reach out if you need any guidance finding the right solution, as we're here to help you amplify satisfaction and success. The future looks bright, and we can't wait to build it with you!

Last updated • January 17, 2024